Calculating income tax on your salary is an essential part of financial planning. This guide will show you how to calculate income tax on salary with an example.
Steps to Calculate Tax on Salary
The following steps can be applied if you have opted for the old tax regime.
1. Compute Gross Salary
Sum up the basic salary, HRA, and other allowances.
2. Calculate Exemptions
Calculate HRA exemption, Section 10 exemptions (like LTA), and other allowances.
3. Deduction under section 16
Provide for standard deduction (Rs. 50,000), professional tax (if any), and entertainment allowance (if applicable)
4. Determine Net Salary
Subtract exemptions and deduction under section 16 from the gross salary.
5. Apply Deductions
Calculate contributions to Provident Fund, life insurance policy premiums, and other eligible investments under Section 80C, 80D etc. which are eligible as per the deduction rules.
6. Compute Taxable Income
Subtract deductions from net salary to get taxable income.
7. Apply Tax Slabs
Apply the applicable income tax slabs to the taxable income.
8. Calculate Final Tax Payable
Subtract any tax rebates and surcharge (if applicable) and add cess to get the final tax payable.
Under the new tax regime, you will not be able to claim any exemptions/deductions under the provisions of Income-tax Act, 1961 except the standard deduction of Rs 50,000. The tax slab rates are rather straightforward. If you have opted for the new tax regime, you can follow the same steps as above but skip the calculation of exemptions/deductions (as the case may be).
Let’s calculate tax on salary for Mr. Sharma, whose salary details are as follows:
Life Insurance Policy Premium: ₹20,000
Step-by-Step Calculation:
1. Gross Salary
₹7,00,000 + ₹3,00,000 + ₹2,00,000 = ₹12,00,000
2. HRA Exemption
Let’s assume the HRA exemption is ₹1,50,000.
3. Standard Deduction
Account for standard deduction of ₹50,000
4. Net Salary
₹12,00,000 - ₹1,50,000 - ₹50,000 = ₹10, 00,000
5. Deductions (80C):
PF Contribution: ₹50,000
Life Insurance Policy Premium: ₹20,000
Total Deductions: ₹70,000
6. Taxable Income
₹10, 00,000 - ₹70,000 = ₹9,30,000
Applying Tax Slabs:
Up to ₹2.5 lakhs: Nil
₹2.5 lakhs to ₹5 lakhs: 5% of ₹2.5 lakhs = ₹12,500
₹5 lakhs to ₹10 lakhs: 20% of ₹4. 3 lakhs = ₹86,000
Total Basic Tax: ₹12,500 + ₹ 86,000 = ₹98,500
7. Final Tax Payable
Basic Tax payable (₹98,500) + Cess @4% (₹3,940) = ₹1,02,440
Online income tax calculators are one of the most accessible tools you can use to ease the process of your tax calculation. However, before you use these tools, it is ideal to know how tax on salary is calculated. These calculators give estimates for tax on salary based on the details you provide.
Disclaimers:
IndiaFirst Life Insurance Company Limited, IRDAI Regn No.:143, CIN: U66010MH2008PLC183679, Address: 12th & 13th floor, North [C] Wing, Tower 4, Nesco IT Park, Nesco Center, Western Express Highway, Goregaon (East), Mumbai – 400 063. Toll-free No – 18002098700. Email Id:customer.first@indiafirstlife.com, Website: www.indiafirstlife.com, Fax No. +91226570600. For more details on risk factors and terms and conditions, please read the sales brochure carefully before concluding the sale. Trade logo displayed above belongs to our promoter M/s Bank of Baroda and is used by IndiaFirst Life Insurance Co. Ltd. under license.
Customers 
Distributor 
Employee 
